CRUDE STORAGE ECONOMICS - LBCG · 2015-06-29 · Your global energy partner LUKOIL Pan Americas, LLC 1 CRUDE STORAGE ECONOMICS Crude Markets and Storage Summit Tamela W. Hamilton

Your global energy partner

LUKOIL Pan Americas, LLC

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CRUDE STORAGE ECONOMICS

Crude Markets and Storage Summit Tamela W. Hamilton

Director, Business Development LUKOIL Pan Americas LLC

[email protected] 713.929.6771 June 30, 2015



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CONTENTS

About Lukoil – 3

Storage constraints in today’s markets – 10

Future production – 12

U.S. Crude Imports – 16

Crude stocks and inventory – 20

Recent price activity - 24

Storage Economics - 28

Conclusions - 30



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LUKOIL TODAY

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• $144 billion revenue, $16 billion EBITDA in 2014

• 13.6 billion boe global oil reserves (#1 among global private companies)

• 2.3 million boepd in global oil production in 2014 (#3)

• 4.1 billion boe global gas reserves; 118 million boe in global gas production

Lukoil operates in 34 countries

• Exploration – 11 countries

• Proven oil reserves – 7 countries

• Proven gas reserves – 5 countries

• Oil processing – 6 countries

• Fueling stations – 24 countries



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EXPLORATION AND PRODUCTION

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• Organic growth of reserves at 815 million boe year over year; 121% hydrocarbon reserve replacement in 2014

• About 14 billion barrels in recoverable reserves • Current production 420kbpd, target 1.2 million bpd by 2020

MEGA-PROJECT "WEST QURNA-2"



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REFINING AND MARKETING • 1.6% of global oil refining capacity – 1.3 million barrels per day

• 918,000 bpd-Russia • 196,000 bpd-Bulgaria • 48,000 bpd-Romania

• 320,000 bpd-Italy • 72,000 bpd-Netherlands

• 5782 petrol stations in 24 countries • Motor fuels meet North American specs • 370 types of lubricants



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HUMAN CAPITAL

• 110,000 specialists • 60 Russian regions • 34 countries of the world:

• Asia • Europe • Africa • Middle East • North America • Latin America



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LUKOIL IN THE MARKET •  Privately-held investment-grade

company •  Traded on stock exchanges in London,

Frankfurt, Moscow, and New York •  Lower total debt to equity ratio than

most of its peers •  Lower ruble and export taxes mute

effect of depressed oil prices (~4:1 ratio)

•  Limited sanctions impact • None of LUKOIL’s executives have been sanctioned. • Only named in one sanction which restricts transfers of technology in support of deepwater offshore or shale projects that have the potential to produce oil in the Russian Federation. LUKOIL has no deepwater or shale oil production in Russia.



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LITASCO SA (LUKOIL International Trading and Supply Company) is the exclusive international marketing and trading company of LUKOIL. We

manage LUKOIL’s global crude oil and petroleum products supply, refining, marketing and trading needs, moving 2.5 million barrels per day of company

and 3rd party barrels.



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LITASCO Group in the World

LUKOIL Sweden Focus of operations •  Shipping operations

management

Main markets served Globally

Representative offices LITASCO Moscow LITASCO Beijing

LITASCO Central Asia Focus of operations •  Trading crude and all

products Main markets served •  Central Asia

LUKOIL Asia Pacific Focus of operations •  Trading all products

Main markets served •  Singapore , SE Asia

LUKOIL Hamburg Focus of operations •  Trading naphtha and

condensate

Main markets served •  Europe, North Africa

LITASCO SA Geneva Focus of operations •  Trading crude, products and

petrochemicals Main markets served •  Europe, FSU, Mediterranean ,

North& West Africa •  Global arbitrage

LUKOIL Benelux Focus of operations •  Fuel oil and marine fuels

blending and marketing

Main markets served •  ARA, Baltic, Far East, US

Europe

LUKOIL Pan Americas Focus of operations •  Trading crude and all products •  Crude, fuel oil and gasoline

blending

Main markets served •  North, South and Central

America Caribbean •  Arbitrage to Europe and Asia

LUKOIL Middle East, Dubai Focus of operations •  Trading all products

Main markets served •  Middle East, India, East & South

Africa



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STORAGE CONSTRAINTS IN TODAY’S PETROLEUM MARKETS

Source: IEA Oil Report, 5-13-15

•  Crude market is global; even though US crude exports are constrained, the international supply/demand balance still ultimately sets world oil prices

•  Per most recent IEA report, global oil supply growth was 3.2 Mil b/d YOY in 1Q, while global oil demand growth is projected at 1.1 Mil b/d for 2015



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Stock builds should slow after 2Q; some variables to watch: •  Price changes affecting demand •  Unplanned supply outages; Iranian deal •  US production growth levels



12

RAPIDLY DROPPING RIG COUNTS LEADS TO DROP IN SUPPLIES

Source: IEA Oil Report, 5-13-15

•  Recent price increase led to a lot of producer hedging in ’15/’16

•  30% lower production costs have lowered breakeven levels

•  4000 “fracklog”; completion costs should also come down

•  Struggling producers finding money from private equity, relaxed debt covenants from banks as price rise seen as “inevitable”

•  Takeaway capacity continuing to grow in most areas with long lead pipeline projects still to come

TOO PESSIMISTIC?



13

BOTH EIA AND IEA SHOW US PRODUCTION GROWTH FLATTENING



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MOST FORECASTS BUILDING IN UNPLANNED OUTAGES

CAN ALSO BE BEARISH IF PERFORMANCE BETTER THAN EXPECTED



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SOURCES OF CRUDE FOR REFINERIES: PRODUCTION + IMPORTS – RUNS - EXPORTS = STOCK CHANGE

(Lag in reported import data; stock change already negative)

Rising production continued to force out imports, refineries running flat out



16 Strictly Private & Confidential, not for public dissemination

CANADA IS LARGEST EXPORTER TO US-ABOUT 3.2 Mil bpd in 2015

Incremental production goes to U.S. as Canada lacks attractive export options



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STEADILY DECREASING IMPORTS, ESPECIALLY IN PADD 3, FED BY HUGE GROWTH IN EAGLE FORD & PERMIAN, SOME GOM

• PADD 5 benefits least, with difficulty permitting rail offloading.



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Term sour supplies have tended to be more “sticky” and viewed as strategic for sellers who maintain U.S. pricing formulas, while sweet crudes have been backed out to very low level.



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EXPORTS TO CANADA HAVE PLAYED AN IMPORTANT ROLE IN BALANCING SUPPLIES; EXPORTS ELSEWHERE QUITE SMALL



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EIA EXPECTING RELATIVELY FLAT BUT HISTORICALLY HIGH STOCKS; COULD BRING LOWER PRICE RANGE & VOLATILITY

New normal?

Implies lingering contango; interest rate will impact absolute level



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HAVE US OIL STOCKS PEAKED ALREADY FOR 2015?

Date (through May 22)



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EIA SAYS “YES!”



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OIL STOCKS GROWING MOSTLY OUTSIDE US AND EUROPE IN 2Q AS TANKS WERE MOSTLY FULL ALREADY; CUSHING GOT VERY CLOSE

TO CAPACITY; GULF COAST CAPACITY NUMBER IN QUESTION

0

50000

100000

150000

200000

250000

300000

350000

400000

1 2 3 4 5

'000

BB

LS

PADD

Crude Storage Capacity and Inventory

Tank Farms

Refineries

Inventory



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WTI SPREADS FELL AS INVENTORIES ROSE TO PAY MARKET TO STORE OIL; TODAY, SPREAD DOESN’T COVER TANK RENTAL & OTHER

EXPENSES BUT DOES COVER INCREMENTAL FINANCING COSTS

-4

-3

-2

-1

0

1

2

3

$/B

BL

Month 1 - Month 2

Brent

WTI



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SPREADS AND OUTRIGHT PRICE IMPROVED WELL BEFORE INVENTORIES STOPPED BUILDING; HIGHER PRICE BROUGHT

RENEWED PRODUCER HEDGING

40

50

60

70

80

90

100

110

-8

-6

-4

-2

0

2

4

6

$/B

BL

December ‘15-’16 and ‘16-’17 (left axis) WTI front line (right axis)

Z5-Z6

Z6-Z7

WTI

CONTANGO

BACKWARDATION



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FALL TURNAROUNDS COULD PRESSURE PRICE/SPREADS



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…ESPECIALLY IF UNPLANNED OUTAGES ARE HIGH



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ON SHORE STORAGE ECONOMICS

•  Monthly storage rates affected by timing of contract (market spreads), connectivity of terminal, flexibility of tanks, term, and ancillary fees; pump fees in and out do not always apply; fees to water can vary greatly

•  Monthly storage rates can vary between ~$.20-$1.20/month, Caribs typically more expensive than US, Canada higher still; reflects higher building costs

Monthly storage rate $0.60Pumping fee $.08 /bblCrude Price, $/bbl $60 /bblInterest rate 2.50%Insurance cost $.02 /bblMonthly Interest cost, $/bbl $.12 /bbl TOTAL BASE COST $.898 /bbl

TOTAL BASE COST-‐3 months $.79 /bbl(Amortizes pumping fees in and out)



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FLOATING STORAGE ECONOMICS VLCC TC Rate $60,000Auxiliary Engine Consumption Rate 10 tons/dayMGO Cost $575/mtVessel Capacity 2,000,000 bblCrude Price, $/bbl $60 /bblInterest rate 2.50%

Monthly Vessel Storage Expense $1,972,500Vessel Cost $.99 /bblInsurance cost $.02 /bblMonthly Interest cost, $/bbl $.12 /bbl TOTAL BASE COST $1.11 /bbl

$0.99 $40,000 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000$450 0.668 0.743 0.818 0.893 0.968 1.043 1.118$500 0.675 0.750 0.825 0.900 0.975 1.050 1.125$550 0.683 0.758 0.833 0.908 0.983 1.058 1.133$600 0.690 0.765 0.840 0.915 0.990 1.065 1.140$650 0.698 0.773 0.848 0.923 0.998 1.073 1.148$700 0.705 0.780 0.855 0.930 1.005 1.080 1.155

$/BBL Monthly Storage Rate -‐ VLCCVLCC Time Charter Rate

MGO

Cost

•  Rates about $40-$50k/day in Singapore; $65-$70k for USG

•  We think only about 10 ships storing oil in Singapore area; none in USG; total VLCC fleet in oil trade about 665 ships

•  Iran has 12-15 storage ships •  ECA regs have very little impact; not

much bunker burned while idle anyway •  On average, about 100 million barrels

in-transit on ships; recently (mid May) as high as 175 million per Bloomberg



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FLOATING STORAGE ECONOMICS Other factors to consider….

•  LOCATION OF VESSEL •  Many companies have moratorium on floating storage in

certain locations due to large potential liabilities •  Consider likely disposition of oil; economics on previous

page did not include any re-positioning costs •  DIFFERENTIAL TO BRENT

•  If storing crudes other than Brent, this creates exposure to the differential as well; may not be hedgeable

•  OPTION TO RESPOND TO PROMPT NEEDS •  Having oil close to a market can create opportunities if

schedules change, ships slip and refiners need prompt oil •  FLOATING STORAGE RARELY WORKS AS LESS

EXPENSIVE ONLINE STORAGE FILLS FIRST •  Worked in 2008 after financial crisis and again in early 1Q •  Weak July Brent opened window as well



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CONCLUSIONS* •  Current forward spreads indicate that market participants

believe on-land US stocks will continue to draw modestly or at least remain at today’s levels

•  Prompt July/August WTI spread covers TVM but not all of the “sunk cost” tank rental

•  July/Aug Brent expired at levels that support floating storage

but spreads in Aug/Sept and Sept/Oct Brent or WTI are not wide enough for floating storage but encourage on land inventory builds for those with contractual storage commitments

•  Brent spreads are weaker, may bleed over to WTI; WTI market likely to pull back in next 30-60 days as we approach fall turnarounds but flat price lows probably in for the year *On June 15

Documents

CRUDE STORAGE ECONOMICS - LBCG · 2015-06-29 · Your global energy partner LUKOIL Pan Americas, LLC 1 CRUDE STORAGE ECONOMICS Crude Markets and Storage Summit Tamela W. Hamilton